FINS3616 – International Business Finance - iLab Assignment
Weighting
This assessment is worth 15% of your final grade for FINS3616 – International Business
Finance. Next to each question is the allocation of marks. There are a total of 30 marks for
this assignment.
Assignment Learning Objectives
The purpose behind this assignment is to get students to:
1. apply and assess the relevance of the International Parity Conditions and Purchasing
Power Parity (PPP) Theory in a practical setting,
2. think outside the textbook and homework questions framework,
3. conduct their own research,
4. using actual data and statistical methods (regression and regression analysis),
5. explore and visualize macroeconomic data and improve their familiarity with statistical
tools in Microsoft Excel.
This assignment is designed to give students an insight into how economists and analysts in
industry approach the topic of exchange rate modelling.
This assignment is individual work and must be submitted as individual work only.
FINS3616 – iLab Assignment
The LIC will randomly assign each student one of five countries in the list below:
1. Canada (CAD)
2. Mexico (MXN)
3. Norway (NOK)
4. Sweden (SEK)
5. Thailand (THB)
Once assigned a country, the student will analyse the exchange rate 𝑒ℎ/𝑓 comprising that
country’s currency in relation to that of the United States (USD). The USD is the base
currency irrespective of which currency you have been allocated. Thus, if you are
assigned Sweden, then you need to complete the iLab assignment on the SEK#/USD
exchange rate. The SEK#/USD exchange rate is interpreted as the number of SEK per USD.
Download the Excel file uploaded on Moodle to see which country you have been allocated.
Section 1 – Qualitative Analysis.
You are constructing a regression model to forecast an estimate of the exchange rate. You
expect changes in future exchange rates depend on a set of key macroeconomic variables:
− the countries’ real GDP growth rates
− the inflation rate differential
− long-term interest rate differential
Answer the following questions below. The limit for each question is 300 words.
1.1 – Summarize the exchange rate systems in both countries and comment on the
reputation and independence of each country’s central bank. (2 points)
1.2 – Comment on the sovereign and political risks of both countries that are relevant to
exchange rates. (2 points)
Section 2 – Downloading the Data and Setting up the Excel File.
2.1 – Using FACTSET, obtain quarterly data from 2001Q1 to 2024Q4 on:
- The exchange rate 𝑒ℎ/𝑓 you have been randomly assigned.
- Economic growth rates for both countries, defined as the year-on-year % change in
real GDP.
- Inflation rates for both countries, defined as the year-on-year % change in the CPI.
- Long-term interest rates for both countries.
2.2 – Using the data you collected from FACTSET, calculate the following:
- The change in exchange rates over (i) 1 quarter, (ii) 1 year, and (iii) 3 years. These
must be forward-looking. Calculating a forward-looking change in the exchange rate
is best illustrated by an example. Thus, for example, the one-quarter change in the
exchange rate, 𝑒ℎ/𝑓, for December 2022 is:
𝑒ℎ/𝑓,𝑡=𝑀𝑎𝑟𝑐ℎ 2023
− 1
𝑒ℎ/𝑓,𝑡=𝐷𝑒𝑐 2022
- Economic growth rates for both countries as a decimal. This is done by dividing the
FACTSET value by 100.
- The inflation rate differential as a decimal (ensure that you divide the FACTSET
value by 100), which for simplicity, we define as the term currency rate (ℎ) less the
base currency rate (𝑓).
- The long-term interest rate differential as a decimal (ensure that you divide the
FACTSET value by 100), which for simplicity, we define as the term currency rate
(ℎ) less the base currency rate (𝑓).
Section 3 – Data Exploration and Visualization
Using the data you collected from FACTSET, answer the following questions (limit for each
question is 200 words):
3.1 – Estimate the mean and standard deviation of the exchange rate. (1 point)
3.2 – From the results on 3.1, did USD appreciate or depreciate on average? Is the
exchange rate volatile during the sample period? (2 points)
3.3 – Estimate the mean and standard deviation for the real GDP growth, inflation rate, and
long-term interest rate of each country. Comment on the difference/similarity of the
distributions of the two countries. (2 points)
3.4 – Relate the average difference of GDP growth, inflation rate, and long-term interest rate
with the exchange rate. (2 points)
Section 4 – Regression Modelling
4.1 – Consider the following econometric structural model of the change in the exchange rate:
Δ𝑒ℎ/𝑓,𝑡 = 𝛽0 + 𝛽1Δ𝐺𝐷𝑃ℎ,𝑡 + 𝛽2Δ𝐺𝐷𝑃𝑓,𝑡 + 𝛽3𝐼𝑛𝑓𝑅𝐷𝑡 + 𝛽4𝐼𝑛𝑡𝑅𝐷𝑡 + 𝜖𝑡 (1)
where
Δ𝑒ℎ/𝑓,𝑡 is the percentage change in the exchange rate over period 𝑡.
Δ𝐺𝐷𝑃𝑡 is the annual percentage growth rate in real GDP over period 𝑡.
𝐼𝑛𝑓𝑅𝐷𝑡 is the inflation rate differential for period 𝑡.
𝐼𝑛𝑡𝑅𝐷𝑡 is the interest rate differential for period 𝑡.
𝜖𝑡 is the error term for period 𝑡.
Using linear regression, obtain the coefficient estimates for each of the 3-time horizons. You
need to report for each time-horizon, ALL coefficient estimates, p-values, adjusted R-squares,
F-statistics (and p-value) in one table, so the grader is able to see your results in your written
submission (rather than the Excel file). (4 points)
4.2 – Analyse the statistical significance of the coefficient estimates at the 5% level. You are
to provide a summary/high-level analysis of the key results. Word limit: 150 words. (1 point)
4.3 – Consider adjusted R-squared as the forecast horizon increases from 1 quarter to 3
years. Provide some commentary and discuss whether such results (across the 3 models)
are consistent with PPP theory. Word limit: 150 words. (2 points)
4.4 – Which macroeconomic variables from the model you have estimated are considered
economically important for modelling changes in the exchange rate? Are you surprised by
these results? Are they consistent with PPP theory? Word limit: 150 words. (3 marks)
Section 5 – Forecasting
5.1 – Using the latest values of the key macroeconomic variables forecast the estimated
change in the exchange rate:
a) 1-quarter ahead,
b) 1-year ahead
c) 3-years’ ahead
Report the magnitude of the forecasts for each regression model in no more than two
sentences. Provide brief commentary (no more than one sentence) as to whether the currency
you have been assigned is forecast to depreciate or appreciate against the USD over each
forecast horizon. (3 marks)
Section 6 – Advanced Question
Pick ONE of the following questions (6 marks):
Note: You will be granted partial credit by commenting and discussing the question without
conducting your own empirical test. However, a full mark will only be granted to the answer
with both qualitative and quantitative analyses. For the empirical analyses, you can keep the
three horizons as they have been used in the main analyses.
(a) Impact of the unusual periods: Some particular events or periods, such as the Global
Financial Crisis (GFC) and the COVID-19 period, may bias our regression results. Do the
results of our model differ with/without the period (GFC: Year 2007-08; and COVID-19:
Year 2020-21)? Comment on the reason for the difference/indifference. What is the
implication of this difference/indifference on the practical applications of our model?
(b) Predictability: Comment on the model’s performance using both in-sample and out-ofsample
predictability. You can use rolling regressions (with Excel Function =LINEST)
and/or cut the sample in half into training and testing sets to test out-of-sample
predictability. Does our model work well in predicting out-of-sample? Comment on the
potential reason for the difference and the implications of this difference on the practical
applications of our model.
(c) Stock market influences/correlations: Are the market indices affected by the
exchange rates in the first place? To test this, download the market index for your
covered nations: Canada (S&P/TSX), Mexico (IPC MEXICO), Norway (Oslo Bors All-
Share), Sweden (OMX Stockholm 30), and Thailand (SET). Run regressions with the
market index as the dependent variable and exchange rate as the independent variable.
Do exchange rates have significant effects on the market index? Comment on the results
and the potential implications of the results on the practical applications of our model.
Note: your market index may not have an equal length with your exchange rate data; in
such a case, trim the longer one (e.g., 2001-2024) to the shorter one (e.g., 2006-2024) to
have a matched period and run the regression.
Additional Information
Note 1: Grammar, Spelling, Punctuation, and Style.
6.2.1 Your final mark can be affected by the grammar, spelling, and overall professionality
of the responses. Also, ensure that all data and calculations in the Excel file are
expressed to 3 decimal places. You need to ensure that your work is polished and
contains NO errors. Remember that you are presenting your work. When you are
working professionally, the market expects high-quality output.
6.2.2 If you use sources in your answers, ensure that you formally cite them. The style of
referencing is for you to decide.
6.2.3 Plagiarism is not tolerated. Your answers must be written by you and only you. Turnitin
has a similarity indicator that reports a percentage similarity score. Submissions with
similarity scores should not be greater than 15% if they are written in your own words.
Turnitin includes the cover sheet and your reference list in its calculation of its similarity score.
However, the grader will be able to filter this out and see the percentage similarity score based
only on the student’s written responses.
Note 2: iLab Assignment Submissions and Responses.
1. Students will only be permitted to submit their iLab assignment ONCE in Turnitin.
There are NO multiple submission options permitted. What is submitted first will be
graded.
2. There is NO grace period for any submissions.
3. Lengthy responses to questions will result in only the first 150 words of each part (or
whatever the word limit is for that section) being graded.
4. If a student submits their iLab assignment on an exchange rate other than the
exchange rate they were assigned, then they have not followed instructions. The
maximum grade a student will then obtain is 60% for this assessment.
5. If a student submits their iLab assignment via the incorrect Turnitin submission link,
then 1 mark will be deducted.
6. You must type your answers and submit as a PDF document via Turnitin. Ensure that
the cover sheet is attached with your submission. See Moodle for cover sheet. A
submission without the cover sheet will result in 1 mark being deducted. If your
submission is not submitted in PDF format, 1 mark will be deducted.
7. Submit your Excel file with the calculations. Failure to submit the Excel file will result
in a deduction of 5 marks.
8. The School of Banking and Finance’s policy stipulates late submissions will attract a
5% penalty per day following the assignment due date (weekend days included). A
submission made one week (that is, 5 days) after the specified due date will result in
a grade of 0.
The LIC or iLab Instructor reserves the right to add to this list in light of changing conditions.
Any changes made will be communicated with students as an announcement via the Moodle
webpage.